Observers of the US political scene complain about a dearth of leadership. The same is also true of the corporate world. Just as politicians are mesmerised by polls, chief executives are enslaved to the share price. Today’s US bull market is sustained by one key ingredient: the share buyback. Profit margins are falling. Investment opportunities are apparently lacking. All that remains is to shrink the number of shares. America’s buyback boom may not be a crisis of capitalism. But it is a warning sign. When companies put their chips on financial engineering they are betting against the future.

This year US buybacks are on course for the first time to exceed $1tn. It would be less worrisome were the binge confined to one or two sectors, say big oil and mature drugs companies. But that is far from the case. From Apple to Pepsi, chief executives in all sectors live in fear of the activist investor.

Likewise, it would be less troubling if the trend were purely cyclical. But buybacks have been rising as a share of profits for more than 30 years. Last year, the S&P 500 companies spent 95 per cent of their operating margins on their own shares or in dividend payouts. To judge by the activity since January, buybacks are on course to exceed 100 per cent of profits in 2015.

In theory companies are meant to raise money from the stock market to invest in their future growth. Exactly the reverse is taking place. Last year, the volume of buybacks was $550bn, according to Bloomberg, while the amount of new money coming into the market, mostly into mutual and exchange traded funds, was just $85bn. During 2015 the trend has increased sharply. Not only have buybacks jumped: they hit a record $104bn in February. But investors have actually been withdrawing money from the market.

There are wise investors, such as Warren Buffett, who argue that share buybacks are a rational way for companies to dispose of idle cash. Mr Buffett has made a lot of money from his stake in IBM over a period where its profit margins have been falling and it has been struggling to find a new business model. Like many troubled behemoths, it has kept shareholders happy by buying back its own shares.

Between 2004 and 2013 IBM spent $116bn in buybacks, which accounted for 92 per cent of its profits, according to a Brookings paper.

Doubtless General Electric, which recently announced it would sell off its non-industrial businesses, will also be able to buy some goodwill. The point of GE’s divestments is to focus on its core industrial business. Yet its disposals will in the first instance help fund a $50bn share buyback.

On a company-by-company basis, Mr Buffett has a point. But Larry Fink, the head of Blackstone — the largest asset manager in the world with a $4.65tn portfolio — has a better one. In a letter to 500 S&P chief executives this month, Mr Fink accused America’s business leaders of eating their own seed corn.

Their obsession with short-termism would come at the expense of the future, he said. “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders . . . while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth,” he wrote.

Most chief executives, of course, won’t be around to take the blame. In the meantime they are making hay at society’s expense. Anything up to 90 per cent of CEO remuneration comes from equity-linked pay. Under remarkably lax Securities and Exchange Commission regulations companies can choose when and by how much to boost their executives’ rewards with the timing of their buybacks.

Among efficient market theorists, maximising shareholder value remains the watchword. In practice MSV should stand for minimising social value. It is no accident that the rise of buybacks has coincided with the boom in downsizing. Why invest in your employees’ skills when you can boost your earnings now?It is tempting to believe the buyback boom will come to a halt when the US Federal Reserve puts up interest rates. A large chunk of the buybacks are funded by corporate bonds issued at historically low interest rates. Once Treasury yields start to rise again, it will become more expensive for companies to buy back their own shares with borrowed money. But the opposite is just as likely to happen.The point of zero interest rates was to help reflate the US economy. Even before the end of quantitative easing last year, profit margins were falling. Since then, the rise of the US dollar has hit overseas sales, which account for roughly a third of S&P 500 revenues. A turn in the interest rate cycle is likely to boost the dollar more, thus further squeezing US corporate margins.What will the GEs and IBMs do then? In an ideal world, they would weather the storm to focus on future growth. In the real one, they will be under even greater pressure to meet their earnings targets. Mr Fink argues that “corporate leaders’ duty of care and loyalty is not to every trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners”. The future of the US economy would look brighter if its chief executives were listening.

The West lacks a shield against formidable foes and is losing the battle against Jihadi terrorism as chaos spreads across the Middle East

By Ambrose Evans-Pritchard, Houston

8:29PM BST 26 Apr 2015

Gen Alexander warned that the US and it allies have failed to check the advance of Islamic StatePhoto: David Paul Morris/Bloomberg

The West is losing the worldwide fight against jihadist terrorism and faces mounting risks of a systemic cyber-assault by extremely capable enemies, the former chief of the National Security Agency has warned.

"The greatest risk is a catastrophic attack on the energy infrastructure. We are not prepared for that," said General Keith Alexander, who has led the US battle against cyber-threats for much of the last decade.

Gen Alexander said the "doomsday" scenario for the West is a hi-tech blitz on refineries, power stations, and the electric grid, perhaps accompanied by a paralysing blow to the payments nexus of the major banks.

"We need something like an integrated air-defence system for the whole energy sector," he said, speaking at a private dinner held by IHS CERAWeek in Texas.

More insidiously, there is now a systematic effort by state-backed hacking teams to steal technology from Western companies. "This is the biggest wealth transfer in history," he said.

Gen Alexander warned that the US and it allies have failed to check the advance of Islamic State (Isil) or its expanding network of franchises across the Middle East. The West is increasingly at risk of a strategic defeat in the region. "It is getting worse. Twenty-five countries are now unstable, just look at Yemen," he said. Saudi-led air strikes against the Shia Houthi rebels in Yemen have killed over 1,000 civilian and displaced 150,000, without restoring any semblance of political order. A particularly aggressive faction of the Jihadi nexus – al-Qaeda in the Arabian Penisula – has exploited the crisis to free its prisoners and seize the country's fifth biggest city. The French oil group Total has suspended operations in Yemen, cutting off 30pc of the state's budget revenues. The country risks becoming another failed side along the lines of Libya. Diplomats warn that the crisis evolved into a Sunni-Shia proxy war between Iran and the Saudis, with the risk of a boomerang back into Saudi Arabia itself, where a restive Shia minority is sitting on the world's biggest oil field.

Gen Alexander, who served as head of US Cyber Command as well as director of the electronic eavesdropping agency, listed five countries able to conduct cyber-warfare at the highest level: the US, UK, Israel, Russia, and surprisingly Iran. He did not include North Korea, describing the cyber-sabotage of Sony last year as relatively primitive. The attack could have been prevented with early warning sensors that pick up changes in the "behaviour" of computer systems. China clearly has first-rate hackers, allegedly concentrated at a 2,000-strong cell of the People's Liberation Army in Shanghai. The current NSA chief Michael Rogers testified late last year that China is capable of cyber-attacks that could cause "catastrophic failures" of the water system or the electricity grid. Hank Paulson, the former US Treasury Secretary and author of a new book entitled "Dealing With China", told the CERAWeek conference that Chinese hackers have been stealing intellectual property on a large scale. “That’s the most quarrelsome issue because it plays to the common perception that China doesn’t play fair. US companies have got to do a better job of hardening their systems,” he said. There is no suggestion that China has an intention to use its power to damage US infrastructure. NSA officials are less confident that Iran will show self-restraint. The Iranians revealed their skill in August 2012 with a taunting virus attack on Saudi Aramco, Saudi Arabia's state-owned oil giant. Hackers erased most of the company's emails and documents, leaving an image of a burning American flag on the computer system as their calling card. There was a similar attack on Qatar's state-energy group RasGas. The action was a form or retaliation for economic sanctions against Iran, but also a warning shot to Riyadh in an escalating battle for Mid-East dominance by the two regional superpowers. It is highly pertinent today given comments by leading figures in Tehran that the Saudis will be "punished" for their decision to drive down the price of oil. A report by the cybersecurity firm Cylance Corp claimed that Iran's experts have hacked into the email systems of the US navy and marines, as well as other critical computer systems in Britain, France, and Germany. The American Enterprise Institute has issued its own report concluding that the nuclear deal with Iran will merely enable the country to step up its step up its attacks. "It would be comforting to imagine that a new era of détente will end this cyber arms race. There is, unfortunately, no reason to believe that that will be the case," it said. Gen Alexander remains defiantly unapologetic about the NSA's collection of metadata on US citizens for anti-terrorism purposes – exposed by NSA contractor Edward Snowden – conceding only that the agency did not act quickly enough to "get out in front" and defend itself. He said the programme had been approved by the courts, both parties in Congress, and the White House. "The courts oversaw what we were doing every step of the way," he said. Gen Alexander instructed the NSA's staff to sit down with the American Civil Liberties Union (ACLU) when the storm hit – after the ACLU had a filed a lawsuit – and explain exactly what the agency had been doing and why. "We gave the ACLU 100pc," he said. The overtures appear to have been partially successful, if too late to stop a public relations disaster. The civil liberties watchdog concluded that America's spies had been acting with professional integrity. However, the ACLU continues to insist that the "surveillance superstructure" established by the US Patriot Act, FISA Amendments, and Executive Order 12.333, together strike "at the core of our rights to privacy, free speech, and association." "History has shown that powerful, secret surveillance tools will almost certainly be abused for political ends," it said. Gen Alexander said he learned from a tip-off days in advance that Mr Snowden was about to expose a vast cache of NSA files, and is not yet convinced that he was acting alone. "Why did he go to Russia? We still have a lot of suspicions about his motives," he said.

As pretty much everyone is now aware, US Q1 growth was way below expectations. And the only reason it was even marginally positive was because businesses expanded their inventories at a record rate. Here's a chart from Zero Hedge comparing the economy's growth with that of inventories:

In other words, if US businesses had just kept inventory levels stable in the first quarter, the economy would have contracted at a 2% rate.Which once again takes us back to the observation that a strong currency slows down growth by making exports more expensive and therefore harder to sell. Nothing very deep or complicated here, but still apparently beyond the grasp of the economic forecasters who keep expecting an imminent rebound.Going forward, two things are now virtually certain:

That massive inventory build will have to be reversed out in the coming year, which means lower demand for raw materials and, other things being equal, slower growth than would otherwise be the case.

The Fed will abandon its (always highly unlikely) promise/threat to raise interest rates in 2015. With growth trending towards zero and national elections coming up, no government in its right mind would tighten monetary policy. So either the dollar falls hard in anticipation (it's down 1% this morning) or the US takes steps to bring it down.

What to make of all this flailing around? Simply put, the meta-trend towards ever-higher debt and ever less valuable fiat currencies remains in place. Various governments at various times will try to buck this trend, but the results are always and everywhere the same: A rising exchange rate threatens exports, slows growth and forces the errant county back onto the currency war battlefield.It happened to Switzerland last year and now it's happening to the US (and via the yuan/dollar peg, China). One more "unexpectedly" weak quarter and we'll have no choice but to adopt the European negative interest rate, war-on-cash model. American savers will as a result find themselves in an even more uncomfortable spot, either forced to become hedge funds or watch their nest eggs keep shrinking.

Over the past few weeks I’ve asked several western officials whether Saudi Arabia’s bombing campaign in Yemen signalled a fundamental change in Riyadh’s behaviour. Should we expect a far more aggressive kingdom under recently installed King Salman, or is Yemen a one-off war to blow off steam? Are we facing a new Saudi Arabia?

The answer has been consistent: we don’t know yet.

Early this morning, at the curious hour of 4 am Riyadh time, King Salman went some way towards providing an answer. In a bombshell announcement, he sacked crown prince Muqrin, who had been close to the late King Abdullah, and elevated Muqrin’s deputy, the security-minded interior minister Mohammed bin Nayef, to crown prince. More importantly – and controversially – he appointed his favourite son, the young Mohammed bin Salman, as next in line for the throne after bin Nayef.

His message: this is a new era in Saudi Arabia.

Other momentous government changes were announced too, including the retirement of Saud al-Feisal, the veteran foreign minister and face of Saudi Arabia abroad. He was replaced with a non-royal, Adel al-Jubeir, the Saudi ambassador to Washington, ending with a stroke the Feisal branch of the family’s decades-long control of the Kingdom’s foreign policy. Also noteworthy was the appointment of Adel Faqih, the able labour minister, to head the economy and planning ministry.

So what should we make of these changes?

Let’s start with the plus side:

First, the main concern about Saudi Arabia – that it will be ruled for decades by ailing kings – has now been put to rest, with a decisive move to the second generation in the al-Saud family. The line of succession to the sons of the late Ibn Saud, the founder of the kingdom, will be over with King Salman. Younger princes, with more energy and more time to rule (and hopefully reform), will take over after him.

Mohammed bin Nayef, Saudi Arabia's new crown prince (Getty)

Second, the choice of Mohammed bin Nayef, will be greeted with relief abroad, and probably also at home, where his abilities in government, though mostly on the security side, are proven. He’s been a favourite of American and British officials, who lavish praise on his campaign against al-Qaeda militants. At home too, MBN, as he is referred to by foreigners, is well-regarded. One well-connected Saudi tells me that whether MBN is speaking to liberals or conservatives, he can make them feel that he’s one of them.

But the shifts also raise questions. So here’s the potential minus side:

First, the line of succession has now in effect been changed from father to son, rather than brother to brother, with a clear signal from the king that he intends for Mohammed bin Salman to reign.

While such a shift may be healthy for the future of Saudi Arabia, it’s not likely to go down well among the younger members of the family. True, the sidelining of Muqrin is a minor risk for the king – the ex-crown prince doesn’t have his own power centre within the family. But other princes from important branches of the family could take issue. Al-Saud politics are notoriously opaque but analysts and officials abroad will be watching for any hint of dissent.

Second, the 30-year-old Mohammed bin Salman, now defence minister among other portfolios, is untested and though he has time to prove himself, his appointment seems to be an attempt to capitalise on Saudi Arabia’s Yemen campaign, which he has led as defence minister. Outside the kingdom, few believe the war in Yemen has gone well for Saudi Arabia since few of its stated aims have been achieved. But that’s not the view inside the country, where the mere fact of standing up to Iran is widely applauded. As one Saudi analyst says, he hasn’t met a single Saudi opposed to the war. “Saudi public opinion felt humiliated by Iran,” he says, “and the bombing campaign has stopped Iranian expansionism.”

Third, with power now concentrated in the hands of security men – MBN and Prince Mohammed bin Salman – and Saud al-Feisal, the powerful foreign minister, now retired, there are concerns that assertiveness will take the form of more confrontation at a time of growing tensions with Iran. Given the chaotic state of the Middle East, western governments are keen to see more diplomacy than muscle-flexing from Riyadh.

Spying Close to Home

German Intelligence Under Fire for NSA Cooperation

US intelligence spent years spying on European targets from a secretive base. Now, it seems that German intelligence was aware of the espionage -- and did nothing to stop it.It was obvious from its construction speed just how important the new site in Bavaria was to the Americans. Only four-and-a-half months after it was begun, the new, surveillance-proof building at the Mangfall Kaserne in Bad Aibling was finished. The structure had a metal exterior and no windows, which led to its derogatory nickname among members of the Bundesnachrichtendienst (BND), the German foreign intelligence agency: The "tin can."The construction project was an expression of an especially close and trusting cooperation between the American National Security Agency (NSA) and the BND. Bad Aibling had formerly been a base for US espionage before it was officially turned over to the BND in 2004. But the "tin can" was built after the handover took place.The heads of the two intelligence agencies had agreed to continue cooperating there in secret. Together, they established joint working groups, one for the acquisition of data, called Joint Sigint Activity, and one for the analysis of that data, known as the Joint Analysis Center.But the Germans were apparently not supposed to know everything their partners in the "tin can" were doing. The Americans weren't just interested in terrorism; they also used their technical abilities to spy on companies and agencies in Western Europe. They didn't even shy away from pursuing German targets. The Germans noticed -- in 2008, if not sooner. But nothing was done about it until 2013, when an analysis triggered by whistleblower Edward Snowden's leaks showed that the US was using the facility to spy on German and Western European targets.On Thursday, though, SPIEGEL ONLINE revealed that the US spying was vastly more extensive than first thought. The revelations have been met with extreme concern in the German capital -- partly because they mark the return of a scandal that two successive Merkel administrations have never truly sought to clear up.It remains unclear how much the BND knew, and to what extent German intelligence was involved, either intentionally or not. More crucially, it demonstrates the gap in trust that exists between two close allies.

Humiliating Efforts

The German government will have to quickly come up with answers. It will also have to decide how it will confront Washington about these new accusations. In the past two years, Berlin has made little to no progress in its largely humiliating efforts to get information from Washington. The issue that could have been cleared up, at least internally, shortly after the NSA scandal began in the summer of 2013. But BND decision-makers chose not to go public with what they knew.When media reports began emerging that the NSA had scooped up massive amounts of data in Germany and Europe, and that this data surveillance was not being performed exclusively for the global fight against terrorism, BND agents became suspicious. In previous years, BND agents had noticed on several occasions that the so-called "Selector Lists," that the Germans received from their American partners and which were regularly updated, contained some oddities.Selectors are targets like IP addresses, mobile phone numbers or email accounts. The BND surveillance system contains hundreds of thousands, possibly more than a million, such targets. Analysts are automatically notified of hits. In 2008, at the latest, it became apparent that NSA selectors were not only limited to terrorist and weapons smugglers. Their searches also included the European defense company EADS, the helicopter manufacturer Eurocopter and French agencies. But it was only after the revelations made by whistleblower Edward Snowden that the BND decided to investigate the issue. In October 2013, an investigation came to the conclusion that at least 2,000 of these selectors were aimed at Western European or even German interests. That would have been a clear violation of the Memorandum of Agreement that the US and Germany signed in 2002 in the wake of the Sept. 11, 2001 terror attacks. The agreement pertained to joint, global surveillance operations undertaken from Bad Aibling.

Cease and Desist

Washington and Berlin agreed at the time that neither Germans nor Americans -- neither people nor companies or organizations -- would be among the surveillance targets. But in October 2013, not even the BND leadership was apparently informed of the violations that had been made. The Chancellery, which is charged with monitoring the BND, was also left in the dark. Instead, the agents turned to the Americans and asked them to cease and desist.In spring 2014, the NSA investigative committee in German parliament, the Bundestag, began its work. When reports emerged that EADS and Eurocopter had been surveillance targets, the Left Party and the Greens filed an official request to obtain evidence of the violations. At the BND, the project group charged with supporting the parliamentary investigative committee once again looked at the NSA selectors. In the end, they discovered fully 40,000 suspicious search parameters, including espionage targets in Western European governments and numerous companies. It was this number that SPIEGEL ONLINE reported on Thursday. The BND project group was also able to confirm suspicions that the NSA had systematically violated German interests. They concluded that the Americans could have perpetrated economic espionage directly under the Germans' noses. Only on March 12 of this year did the information end up in the Chancellery. Merkel administration officials immediately recognized its political explosiveness and decided to go on the offensive. On Wednesday, the Parliamentary Control Panel met, a body that is in charge of monitoring Germany's three intelligence agencies. The heads of the agencies normally deliver their reports in the surveillance-proof meeting room U1.214. Panel members suspected something was different at this week's meeting when Chancellery head Peter Altmaier, a cabinet-level position in Germany, indicated that he would be attending. The heads of the parliamentary NSA investigative committee were also invited to attend. BND President Gerhard Schindler, however, was asked to stay away. The day after the meeting, the government announced bluntly that Schindler's office had displayed "technical and organizational deficits."

Recast in a Different Light

With that, Germany's foreign intelligence agency has some explaining to do. The BND, after all, doesn't just report to the Chancellery. It has also provided testimony on its activities at Bad Aibling several times to the Parliamentary Control Panel and to the NSA investigative committee. That testimony now appears in a different light.According to a classified memo, the agency told parliamentarians in 2013 that the cooperation with the US in Bad Aibling was consistent with the law and with the strict guidelines that had been established.The memo notes: "The value for the BND (lies) in know-how benefits and in a closer partnership with the NSA relative to other partners." The data provided by the US, the memo continued, "is checked for its conformance with the agreed guidelines before it is inputted" into the BND system.Now, we know better. It remains to be determined whether the BND really was unaware at the time, or whether it simply did not want to be aware. The NSA investigative committee has also questioned former and active BND agents regarding "selectors" and "search criteria" on several occasions. Prior to the beginning of each session, the agents were informed that providing false testimony to the body was unlawful. The BND agents repeatedly insisted that the selectors provided by the US were precisely checked.A senior analyst from the department responsible, known as "Signals Intelligence," testified in March that BND lawyers would check "each individual search term" and "each individual selector" to ensure that it conformed with the Memorandum of Agreement. That didn't just apply to government officials and German companies, he said, but to Europeans more broadly.

'Prosecutors Must Investigate'

"Sneaking in" such search terms would "become apparent" in such a long-term operation, the witness said. "To try, over all these years, to sneak selectors by us to perpetrate economic espionage, I don't think that is possible," the witness said. He added: "We never noticed such a thing."Members of the NSA investigative committee now feel that they have been lied to, and the reactions have been harsh. "At least since the Snowden revelations in 2013, all those involved at all levels, including the Chancellery, should have been suspicious of the cooperation with the NSA," says Konstantin von Notz, the senior Green Party member on the investigative committee."The spying scandal shows that the intelligence agencies have a life of their own and are uncontrollable," says the senior Left Party representative Martina Renner. "There have to be personnel consequences and German public prosecutors must investigate."But as of late Thursday, the German government hadn't even informed the public prosecutor's office of the incident.

There was a presidential statement in the Rose Garden of the White House. There were joyous celebrations on the streets of Tehran. There were lamentations in the US Senate. All these events were provoked by the news, earlier this month, of a framework nuclear deal between Iran and the US.

Three weeks later, the newspapers are still full of critiques of the agreement.

But all of this fuss disguises an awkward fact. There is no Iran nuclear deal.The joint statement released by Iran and its negotiating partners, earlier this month, was a few short paragraphs, skirting all the crucial issues. All the detail about what was “agreed” was actually contained in a unilateral statement issued by the Americans on April 2nd – the so-called White House fact sheet. Iran had not signed off on that “fact sheet”. And, in subsequent days, Iran made it clear that it dissents from the American interpretation of what was agreed. Ayatollah Ali Khamenei, Iran’s supreme leader, has tweeted that the US fact sheet was “wrong on most of the issues”.The disagreements between Iran and America on what was agreed in the Geneva negotiations are – as Mr Khamenei suggests – wide-ranging. They cover everything from the inspections regime, to the precise fate of the reactor at Arak. But perhaps the starkest disagreement is over when sanctions on Iran would be lifted. Ayatollah Khamenei says that all sanctions will have to be lifted on the very day that agreement is reached. The Americans insist that sanctions can only be lifted in phases, as Iran puts in place restrictions on its nuclear programme.The two sides are meant to bridge all these gaps between now and their next deadline of June 30, which is when a final agreement is meant to be agreed. However, given that the framework agreement reached this month is actually a mirage, it seems rather unlikely that the two sides will sign off on the final deal in June – or even later this year.The story of how we got to this delicate and confused stage says a lot about the extreme difficulty of reaching a final agreement. The issuing of the “White House fact sheet” was a calculated gamble by the Americans, who were frustrated by the agonisingly slow negotiations in Geneva. Dismayed by the lack of a detailed agreed text, senior US officials drew up their own memorandum – setting out the various concessions that they believed the Iranians had made over many months of discussions. By releasing the “fact sheet” unilaterally, the US was effectively daring the Iranians to walk away from the negotiating table. The Americans felt that the celebrations in Iran – in response to the announcement of the “deal” – vindicated their gamble. Their calculation is still that Iran’s leaders – having raised domestic expectations that Iran’s international isolation will soon end – will now find it very difficult to dash their people’s hopes, based on some minor-sounding details about the numbers of centrifuges allowed at Natanz, or the phasing of sanctions relief.That calculation could still work. But the increasingly open dissent from within Iran suggests that it could just as easily unravel, as the two sides re-engage in detailed negotiations.The dissent about the White House fact sheet is not just coming from Tehran. The Obama administration is also under increasing pressure from political opponents at home and from allies overseas. The most high-profile opposition comes from the government of Israel and the US Congress. The Obama administration has already had to agree to give Congress thirty days to consider any deal reached with Iran – before the Obama administration could start to issue temporary waivers on sanctions.As well as the Congressional and Israeli hurdles, the US is also facing is also facing dissent from the Gulf Arabs and even some of their European negotiating partners.

The Gulf states, led by Saudi Arabia, are deeply wary of the deal. As Sunni Arabs, they worry that the Persians of Shia Iran are already expanding their influence across the region. They complain of Iran’s hold on “four capitals” in the Arab world – Damascus, Beirut, Baghdad and Sanna (in Yemen).

The Saudis worry that the lifting of sanctions would give their Iranian rivals a big economic and financial boost – allowing them to further expand their influence.

Even within the negotiating group led by the Americans – the so-called P5+1 – there is some uneasiness about the outlines laid out by the White House. A particular issue of concern is whether nuclear inspectors would be allowed into Iran’s military research sites – a point that remains vague, but vital.Given all these doubts and uncertainties, it is tempting to wonder what all the fuss is about. Talk of an Iran “deal” is certainly unjustified. We are a long way from that. Given the gaps between Iran and the US, failure is still more likely than success.And yet the release of the cheekily-named US “fact sheet” was still a justified gamble. It has put momentum into negotiations that were in danger of grinding to a halt. And it has raised the prospect that at least one dangerous dispute in the Middle East can be settled by negotiation and discussion – rather than by violence. The support for that idea amongst ordinary American and Iranians is evident. That popular pressure remains the best hope that the nuclear negotiators may yet come up with a genuine agreement.

KNOWING the worst can help with a recovery. But it is no guarantee. Petrobras issued its much-delayed results on April 22nd, after accountants had scoured its books to find details of many years of scams and kickbacks, which are part of Brazil’s biggest corruption scandal. The state-controlled oil company said that graft had cost it 6.2 billion reais ($2.1 billion). Other charges included a bigger-than-expected write-down of 44.6 billion reais, mainly on a flagship petrochemical complex and a big refinery. The net loss was 21.6 billion reais in 2014, against a 23.6 billion reais profit the year before.Cleaning up Petrobras (and Brazil’s political system) is a long-term job. In the short term the company is focused on survival, with production sinking, oil prices low, cash scarce, and a hefty bill looming to develop its prized assets: the “pre-salt” oilfields that lie deep below the country’s offshore waters.Publishing audited results was vital. Creditors could have demanded early repayment of $54 billion of debt if the company had missed a deadline of April 30th. The previous management’s borrowing binge left Petrobras as the most indebted company in the world, and—when the scandal broke—an outcast from the capital markets.Openness about the past will not forestall American shareholders who are fuming about mismanagement; some have already sued. But for now, investors seem willing to give the new management under Aldemir Bendine, a former boss of state-controlled Banco do Brasil, a chance: Petrobras’s shares have steadied in recent months, though they are still well below their peak (see chart).Mr Bendine says he will husband cash by cancelling this year’s dividend, slash capital expenditure, and sell $14 billion of assets by the end of next year—though finding buyers for them is another story.The company’s future does not lie just with its management. Politicians must not only stop stealing: they must cease interfering too. President Dilma Rousseff’s left-wing Workers’ Party forced Petrobras to sell imported petrol at a loss to keep pump prices low. That made the company bleed cash. The government has since let it raise prices, but Petrobras still suffers political pressure, such as demands for big dividends, which help bolster Brazil’s threadbare public finances. The government insists that Petrobras should take the lead in developing offshore fields—a task for which it may have the technical expertise, but not the balance-sheet.Some of these problems will land on Shell’s desk. The Anglo-Dutch giant has just bought BG, a British energy company, which is a big partner for Petrobras. Mr Bendine says he may seek more ties. Shell has cash and know-how, but may tread carefully in a country where nemesis follows hubris, and there is always plenty of blame to go round.

Oil price fall triggers series of profit warnings among producers, as support services companies bear the brunt of election uncertainty, new report finds

By Szu Ping Chan

1:42PM BST 26 Apr 2015

Oil and gas producers and support services companies topped the list of struggling firms, with eight profit warnings in each sectorPhoto: AP

Plunging oil prices and uncertainty surrounding the general election triggered a wave of profit warnings at London-listed companies in the first quarter.

While the decline in prices has helped put more money in people's pockets and boosted consumer spending, analysis from accountancy firm EY showed UK quoted companies issued 77 profit warnings between January and March, three more than in the same period a year ago.

EY said 5.4pc of all FTSE companies issued a warning in the first three months of 2015. This represents the highest first quarter percentage since 2009, despite the improving economic outlook.

Oil and gas producers and support services companies topped the list of struggling firms, with eight profit warnings in each sector. Retailers issued six profit warnings, according to EY, as shops on the high street and online faced stiff competition.

Brent crude fell to $50 a barrel in January, from a 2014 high of $115 in June. While prices have recovered to just above $65 a barrel, the decline has forced some of the UK's biggest companies to issue profit warnings. Rolls-Royce, the FTSE 100 engineer, said in February that the near-halving in oil prices had created "increased uncertainty for many of our markets and customers", while oil rig maker Lamprell warned in January that the plunge would make it difficult to win new contracts. "Cheap oil is bolstering demand and giving central banks inflation breathing space. However, this recovery is double-edged and unpredictable," EY said.

While many companies have guarded against price fluctuations with hedging contracts, EY said these companies would be exposed if prices remained low. "As hedging contracts run out we may see further waves of profit warnings if prices remain at around $60 a barrel," it said. Support services companies, which rely on the public sector, saw contract awards dry up ahead of the election. EY said there was concern that a hung parliament could further delay contracts. Alan Hudson, EY's UK head of restructuring, said low inflation was helping to keep costs down, but also making it harder to raise prices. The strength of the pound against the euro was also making it difficult to forecast and benefit from the economic upturn.

"The recovery hasn't increased predictability and companies still have little room for manoeuvre when things go wrong, such as a lost contract, adverse currency movement or price drop," he said. "New entrants and technologies add to the competitive tension – as does the accumulated pressure to invest, but also cut prices. "There are clear advantages for businesses that can take the initiative and demonstrate that they have market understanding and the business resilience necessary to match this unpredictable recovery."

At the IMF/World Bank spring meetings in Washington a week ago, downside risks to the Chinese economy were discussed solemnly, but calmly. There was no mood of crisis, no feeling that a major dislocation in the economy or the financial sector was imminent. Meanwhile, the surge in Chinese equity prices so far this year hardly seems to indicate an impending recession.Yet there are signs of trouble ahead.Real interest rates and the real exchange rate have both been rising at a time when the domestic credit market is under stress. Deflation has taken hold in the real estate sector and in the over-supplied heavy manufacturing sector, where much of the troubled debt is to be found. And the most recent quarter has seen GDP growth dipping to its lowest level since the global financial shock. It is becoming apparent that a much larger easing in policy might be needed to head off a hard landing. Fortunately, this is now clearly underway.The underlying growth rate in the economy has now been slowing for many years as economic rebalancing takes effect. In the Fulcrum model for economic activity, the long run growth rate is estimated to have slowed gradually from 11.5 per cent in 2007 to 6.5 per cent now. This decline has been both inevitable and, to a large extent, desirable.Until recently, the model indicated that the actual growth rate in activity was tracking the underlying slowdown fairly closely. Although there has been much discussion about hard landing risks whenever quarterly GDP growth has dipped in recent years, this was never confirmed by our activity model.However, the very weak industrial production data for March 2015, alongside declines in survey data, retail sales and investment, has resulted in a drop in estimated activity growth to only 5.2 per cent.As the graph below on the right shows, the model’s probability distribution for GDP growth in the 2015 calendar year has shifted markedly downwards, with a much increased statistical risk of a sub 6 per cent outcome – one definition of a hard landing in the Chinese context.

Of course it would be wrong to place too much emphasis on one month’s data. But there are some underlying reasons for more concern than has been justified in the temporary weak patches for activity in the past couple of years.Domestic demand has clearly been slowing as monetary conditions have tightened. Real interest rates have remained high, or have actually gone up, as deflation has taken hold in house prices and producer prices. Monetary growth has weakened, though up to now this has been largely because of an intended squeeze on the shadow banking sector.There are two main routes through which the slowdown could develop into something much worse. The first is that the uneasy stability in the savings/investment relationship could change. Martin Wolf warns that investment could slow sharply in a decelerating economy. Alternatively, there could be a rise in household savings in response to concerns about falling housing wealth, which is what happened during the US housing crash. Given the bubble-like surge in equity prices, this may seem improbable, but it would become more likely if the equity surge ends in a crash.

The second route, also reminiscent of events in the US in the last decade, would be a financial crash led by stressed loans to the real estate or manufacturing sectors. Last week, there were defaults by a property developer and a power equipment manufacturer, though many observers saw this as a deliberate and controlled decision by the authorities to inject some discipline into the credit markets. It is widely believed by investors that these stresses can be brought under control, though that is also what was believed about the Federal Reserve in 2008.Until now, the monetary authorities have been disinclined to react aggressively to signs of economic weakening and financial stress, seeing them as part of the solution rather than part of the problem. There has been no precipitous reduction in interest rates, no panic cuts in reserve requirement ratios (RRRs) and, crucially, no apparent desire to weaken the exchange rate. In other words, China has been the only major country to stand aside from the global pattern of unconventional monetary easing.There are now some indications that this may be changing, with the authorities planning measures to ease monetary policy in three different ways:

The one percentage point cut in the RRR announced last week was larger than expected, and is clearly intended to hold down money market rates at a time when large scale capital outflows are tightening monetary conditions, and tending to reduce the PBOC balance sheet. It will “free” about RMB 1.3 trn of bank reserves for other uses. However, market rates still remain positive in real terms, and may need to be reduced further.

It has been reported that the PBOC is contemplating a programme of unconventional monetary easing similar to the LTRO measures undertaken by the ECB in recent years, with elements of the UK’s Funding for Lending Scheme thrown in. This will be aimed at easing the overhang of local government debt, which is being rolled into longer durations via new “municipal” bond issues. Bonds acquired by the banking sector in this process will be allowed to be used as collateral for low interest short term liquidity provision by the central bank, as will other packages of approved new lending by banks. This should be seen as a form of targeted quantitative easing that indirectly finances public debt by expanding the central bank balance sheet. Although similar to a package announced in July 2014 to help small firms, this initiative could become much larger, since the problem of non performing local government debt is potentially massive.

The authorities clearly intend to use the policy banks as an avenue for pseudo-fiscal expansion. Last week, it was reported that they will announce a capital injection of $63 bn into these entities from the foreign exchange reserves, presumably with the intention of enabling them to raise more finance to boost lending on infrastructure, agricultural projects and trade support. President Xi’s ambitious promise of a new silk road – one belt, one road – is becoming a reality.

The story of the deflation of China’s credit mountain will be a book of many chapters. In the next chapter, we will learn whether the authorities have acted in time to correct the first genuine downturn in economic activity since 2008. The odds are in their favour, this time.

LONDON – It is annual general meeting season – the time of year when some of the world’s biggest companies gather to report to shareholders and have some semblance of a conversation with them. For the next couple of months, a succession of companies will talk about what influenced their performance over the previous year, what they are planning for the future, and the decisions that their boards have made.

There was a time when these meetings took place without much fanfare, mostly unnoticed by the public. That has not been true for a couple of years. A worsening economy and widening inequality have spurred more people to become more engaged and take an interest in the activities of companies and those who run them. And, with that change, attention has broadened from CEOs and executive teams to those who previously existed in a black box: the companies’ board members.

In 2012, shareholders and others started shining a bright light on boards, questioning their decisions and activities, and those of individual members, and thus was born the Shareholder Spring. People grew tired of tone-deaf board directors operating in soundproof rooms, seemingly ignoring economic realities and the public’s mood. They wanted to confront those who decide on executives’ often eye-popping compensation or approve companies’ decisions to undertake sophisticated tax engineering.

People wanted to know whether board members were actually doing their jobs or just filling seats and collecting a nice fee.

Many companies and company boards hoped that this heightened interest would pass quickly; instead, it has matured. Discontent has continued to mount, and investors, employees, politicians, and members of the public now want to know not only about executive compensation, but also about the frequently staggering discrepancy between what companies’ highest- and lowest-paid personnel earn.

They want to know about living wages and zero-hours contracts. They want to know what companies are doing to address climate change, whether they are responsible community members, how they behave in conflict zones, and much more.

Those asking the questions are no longer content to protest outside. They are becoming increasingly sophisticated about how to be heard, buying shares, stepping up to the microphone, and looking board members in the eye, so that their questions become part of the official minutes. And they are putting pressure on companies’ major investors to hold board members to account as well.

The questions posed and statements made can sometimes be longwinded. But many of them are legitimate, and they are an important reminder to boards that they must serve the company’s entire ecosystem – investors, employees, customers, and community alike. Indeed, these open meetings are a reminder that board members must ask the hard questions all year round, rather than simply rubber-stamping management proposals or going along to get along.

Interestingly, just as the movement to hold boards to account has gained greater traction, some companies have adopted new ways of convening annual shareholder meetings. These were once fairly staid gatherings. The companies’ senior management would walk investors and board members through the reporting formalities step by step, present results, take questions, vote, and move on. There was tea, coffee, and biscuits, but nothing fancy.

In recent years, however, there has been a trend toward a more carnival-like atmosphere, with companies bringing in big-name entertainers and turning the event into a feel-good pep rally. Last year, Wal-Mart’s annual meeting featured Harry Connick, Jr., Robin Thicke, and Pharrell Williams. In 2013, Elton John performed.

In contrast, other companies have swung to the opposite extreme and embraced fully virtual meetings. The board gathers in front of a camera for a live webcast to shareholders, takes questions submitted in advance, and avoids the protesters altogether. This year, HP joined Sprint and Martha Stewart Living Omnimedia down this road.

There is a virtue to having a meeting with a virtual component: businesses are global, and so are their investors, who can participate without having to get on a plane. But a webcast of a meeting with a live audience would be the ideal combination. And while companies might argue that entirely virtual meetings save money – which of course is true – investors do not need Robin Thicke. They will settle for good numbers, serious discussion, and a dry biscuit.

Boards and managers must take these meetings seriously. Part of the job is facing those with something at stake. Hosting circuses or hiding behind cameras will not keep tough questions from coming. A seat at the boardroom table comes with the responsibility to stand up and do this vital part of the job – in person and without musical accompaniment.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.